Type: Capital-protected bond
Aim: Growth linked to the performance of the FTSE 100 index
Minimum-maximum investment: £3,000-no maximum, Isa £10,680
Term: Six years
Return: 60% growth plus original capital provided the index does not fall by more than 20% over the term, otherwise booster feature provides return of double the final value of the index as a percentage of the initial value
Protection: Original capital returned in full at the end of the term for index falls up to 50% through booster feature, capital protection dependent on the booster calculation for index falls above 50%
Closing date: November 23, 2011, November 16, 2011 for Isa transfers
Commission: Initial 3%
Tel: 020 7425 9000
This FTSE 100-linked structured product provides 60 per cent growth plus original capital provided the index does not fall by more than 20 per cent, otherwise a booster feature provides return of double the final value of the index after six years as a percentage of the initial value.
Chelsea Financial Services head of investment products Matthew Woodbridge says: “This plan was launched as an evolution of the popular defensive digital plan that Morgan Stanley previously brought to market. It is my understanding that as recent market volatility improved the pricing environment, Morgan Stanley was able to put together the booster plan.”
Woodbridge says that to receive the 60 per cent coupon, at the end of the term the FTSE 100 can be up, at the same level or even down by up to 20 per cent, thereby offering returns in a variety of market conditions.
Discussing the positive features of the plan, Woodbridge says: “The product literature is clear and easy to understand. Returns are taxed as a capital gain, as opposed to income, which means that investors who do not normally utilise their CGT allowance could still get all or part of their returns tax free.
“This is potentially very attractive to higher rate taxpayers, especially those with an income of £150,000 or more who are subject to the 50 per cent rate of income tax.”
Woodbridge regards the initial 3 per cent commission as standard adviser remuneration for a six- year structured product.
“What I like about this plan is that investors can still receive a positive return even if the market has fallen by between 20 per cent and 50 per cent. For example, if the market is at 75 per cent of its initial index level at maturity, the plan will pay out a return of 150 per cent. A 50 per cent fall would trigger a 100 per cent return of capital.
“Below that, returns are cushioned, because investors still receive two times the index level. For example, if the index is at 25 per cent of its initial level, investors would still receive 50 per cent of their initial capital,” says Woodbridge.
He feels the plan provides an alternative to traditional long-only funds and could be attractive to advisers looking for ideas for their client’s self-invested personal pension portfolios.
“It is likely to attract investors who wish to receive pre-determined returns even if the index is flat or down over the period.
“Advisers should be aware that the counterparty risk for this product lies with Morgan Stanley – currently rated A by Standard & Poor’s – so they feel comfortable with the level of risk associated with an A-rated counterparty,” says Woodbridge
Turning to the potential drawbacks, Woodbridge says: “Any growth in the index above the coupon level is not passed on to the investor but this is standard among structured products. In addition, no dividends from the Index are payable but this is also standard among structured products.”
Identifying the main competition, Woodbridge says: “This plan appears to be unique amongst UK retail structured products and should be popular with advisers.
“Elsewhere in the structured product market, there is currently a plethora of autocall products. Out of those, we feel the Legal & General early bonus plan offering a potential 8.25 per cent coupon after 12 months with Santander as counterparty offers good value.”
Suitability to market: Good
Investment strategy: Good
Adviser remuneration: Average